1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
STEINER LEISURE LIMITED
(Exact name of Registrant as Specified in its Charter)
COMMISSION FILE NUMBER: 0-28972
COMMONWEALTH OF THE BAHAMAS 98-0164731
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
SUITE 104A, SAFFREY SQUARE
NASSAU, THE BAHAMAS NOT APPLICABLE
(Address of principal executive offices) (Zip Code)
(242) 356-0006
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check [X] whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding
----- -----------
Common Shares, par value (U.S.) $.01 16,615,550 shares as of
per share November 12, 1999
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STEINER LEISURE LIMITED
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. Unaudited Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1998
and September 30, 1999 ..................................................................... 3
Condensed Consolidated Statements of Operations for the Three and Nine Months ended
September 30, 1998 and 1999................................................................. 4
Condensed Consolidated Statements of Cash Flows for the Nine months ended
September 30, 1998 and 1999................................................................. 5
Notes to Condensed Consolidated Financial Statements........................................ 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................... 10
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds................................................... 15
ITEM 6. Exhibits and Reports on Form 8-K............................................................ 15
SIGNATURES.............................................................................................. 16
EXHIBIT INDEX........................................................................................... 17
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1998 1999
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,058,000 $ 18,101,000
Marketable securities 21,782,000 17,499,000
Accounts receivable trade 4,832,000 5,749,000
Accounts receivable - students -- 3,125,000
Inventories 8,002,000 8,342,000
Other current assets 1,142,000 2,044,000
------------ ------------
Total current assets 45,816,000 54,860,000
------------ ------------
PROPERTY AND EQUIPMENT, net 5,840,000 8,252,000
------------ ------------
GOODWILL, net -- 8,560,000
------------ ------------
OTHER ASSETS:
Trademarks and product formulations, net 290,000 239,000
License rights, net 740,000 740,000
Other 968,000 1,599,000
------------ ------------
Total other assets 1,998,000 2,578,000
------------ ------------
Total assets $ 53,654,000 $ 74,250,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,641,000 $ 1,447,000
Accrued expenses 6,434,000 8,280,000
Income taxes payable 848,000 842,000
Current portion of deferred tuition revenue -- 3,224,000
Current portion of capital lease obligations 21,000 2,000
Current portion of long term debt -- 51,000
------------ ------------
Total current liabilities 9,944,000 13,846,000
------------ ------------
MINORITY INTEREST 19,000 19,000
------------ ------------
LONG TERM DEFERRED TUITION REVENUE -- 139,000
------------ ------------
LONG TERM DEBT, net of current portion -- 44,000
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred shares, $.01 par value; 10,000,000 shares authorized,
none issued and outstanding -- --
Common shares, $.01 par value; 100,000,000 shares authorized,
16,603,000 shares issued and outstanding at December 31, 1998 and
16,616,000 shares issued and outstanding at September 30, 1999 166,000 166,000
Additional paid-in capital 12,790,000 13,338,000
Accumulated other comprehensive income 440,000 (57,000)
Retained earnings 35,181,000 51,082,000
Treasury shares, at cost, 313,000 shares at December 31, 1998
and 277,000 at September 30, 1999 (4,886,000) (4,327,000)
------------ ------------
Total shareholders' equity 43,691,000 60,202,000
------------ ------------
Total liabilities and shareholders' equity $ 53,654,000 $ 74,250,000
============ ============
The accompanying notes to condensed consolidated financial statements are an
integral part of these balance sheets.
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STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
REVENUES:
Services $ 15,658,000 $ 20,599,000 $ 43,855,000 $ 54,787,000
Products 11,285,000 13,808,000 30,358,000 38,907,000
------------ ------------ ------------ ------------
Total revenues 26,943,000 34,407,000 74,213,000 93,694,000
------------ ------------ ------------ ------------
COST OF SALES:
Cost of services 12,079,000 15,865,000 33,903,000 42,265,000
Cost of products 7,615,000 9,595,000 20,538,000 27,006,000
------------ ------------ ------------ ------------
Total cost of sales 19,694,000 25,460,000 54,441,000 69,271,000
------------ ------------ ------------ ------------
Gross profit 7,249,000 8,947,000 19,772,000 24,423,000
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Administrative 1,211,000 1,515,000 3,460,000 4,379,000
Salary and payroll taxes 1,260,000 1,535,000 3,722,000 4,343,000
Goodwill amortization -- 49,000 -- 49,000
------------ ------------ ------------ ------------
Total operating expenses 2,471,000 3,099,000 7,182,000 8,771,000
------------ ------------ ------------ ------------
Income from operations 4,778,000 5,848,000 12,590,000 15,652,000
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 435,000 412,000 1,168,000 1,294,000
Gain on sale of marketable securities 18,000 -- 41,000 11,000
Interest expense (1,000) (2,000) (8,000) (5,000)
------------ ------------ ------------ ------------
Total other income (expense) 452,000 410,000 1,201,000 1,300,000
------------ ------------ ------------ ------------
Income before provision for income taxes 5,230,000 6,258,000 13,791,000 16,952,000
PROVISION FOR INCOME TAXES: 517,000 384,000 998,000 1,051,000
------------ ------------ ------------ ------------
Net income $ 4,713,000 $ 5,874,000 $ 12,793,000 $ 15,901,000
============ ============ ============ ============
EARNINGS PER COMMON SHARE:
Basic $ 0.29 $ 0.36 $ 0.78 $ 0.98
============ ============ ============ ============
Diluted $ 0.28 $ 0.35 $ 0.75 $ 0.95
============ ============ ============ ============
The accompanying notes to condensed consolidated financial statements are
an integral part of these statements.
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STEINER LEISURE LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
Nine Months Ended
September 30,
---------------------------------
1998 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,793,000 $ 15,901,000
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 685,000 1,890,000
Gain on sale of marketable securities (41,000) (11,000)
(Increase) decrease in-
Accounts receivable 55,000 (1,776,000)
Inventories (1,647,000) 17,000
Other current assets (892,000) (141,000)
Other assets 140,000 (995,000)
Increase (decrease) in-
Accounts payable 703,000 (1,326,000)
Accrued expenses (638,000) 1,525,000
Deferred revenue -- 743,000
Income taxes payable (35,000) 4,000
Minority interest 15,000 --
------------ ------------
Net cash provided by operating activities 11,138,000 15,831,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (32,459,000) (6,820,000)
Proceeds from maturities of marketable securities 12,438,000 3,730,000
Proceeds from sale of marketable securities 7,621,000 6,304,000
Acquisition of business, net of cash acquired -- (7,759,000)
Advances on construction costs (1,218,000) --
Capital expenditures (384,000) (3,294,000)
Acquisition of franchise rights (823,000) --
------------ ------------
Net cash used in investing activities (14,825,000) (7,839,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (50,000) (19,000)
Payments on long-term debt -- (14,000)
Net proceeds from stock option exercises 1,700,000 106,000
------------ ------------
Net cash provided by financing activities 1,650,000 73,000
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 64,000 (22,000)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,973,000) 8,043,000
CASH AND CASH EQUIVALENTS, beginning of period 12,335,000 10,058,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 10,362,000 $ 18,101,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest $ 8,000 $ 5,000
============ ============
Income taxes $ 1,039,000 $ 1,048,000
============ ============
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
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STEINER LEISURE LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION OF INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS:
The unaudited condensed consolidated statements of operations for the three and
nine months ended September 30, 1998 and 1999 reflect, in the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to fairly present the results of operations for the interim periods.
The results of operations for any interim period are not necessarily indicative
of results for the full year.
The year-end balance sheet data was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles. The unaudited interim condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998.
(2) ORGANIZATION:
Steiner Leisure Limited (including its subsidiaries and predecessors, "Steiner
Leisure;" "we," "us" and "our" refer to Steiner Leisure) is the leading
worldwide provider of spa services and skin and hair care products on board
cruise ships. Steiner Leisure, incorporated in The Bahamas, commenced
operations effective November 1995 with the contributions of substantially all
of the assets and certain of the liabilities of the Maritime Division (the
"Maritime Division") of Steiner Group Limited, now known as STGR Limited
("Steiner Group"), a U.K. company and an affiliate of Steiner Leisure, and all
of the outstanding common stock of Coiffeur Transocean (Overseas), Inc.
("CTO"), a Florida corporation and a wholly owned subsidiary of Steiner Group.
The contributions of the net assets of the Maritime Division and CTO were
recorded at historical cost in a manner similar to a pooling of interests.
As described in Note (4), on August 24, 1999, we acquired the assets of Florida
College of Natural Health, Inc. ("Florida College"). As a result of the
acquisition, we currently operate, through FCNH, Inc., a wholly-owned
subsidiary, four post secondary schools in Florida offering degree and
non-degree programs in massage therapy and skin care and related courses.
Commencing in February 1999, we began operating the luxury health spa at the
Atlantis Resort on Paradise Island in The Bahamas (the "Atlantis Spa"). In
connection with our operation of the spa, we pay the resort owner the greater
of a minimum monthly rental and an amount based on our revenues at the spa. The
resort then pays us after deducting rental payments or other amounts due to the
resort from us.
In January 1998, we acquired for $675,000 the intellectual property (the "BSC
Rights") relating to the Beautiful Skin Centres, a group of Hong Kong day spas
("BSC"). We have begun to license the BSC concept at three former BSC
facilities in Hong Kong under the name "Elemis Beautiful Skin Centres." We
granted the right to operate these initial Elemis Beautiful Skin Centres to the
entity that sold us the BSC Rights. That entity owns 15% of EBSC International
Limited, a Bahamas subsidiary of Steiner Leisure that licenses rights to
operate Elemis Beautiful Skin Centres ("EBSC").
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) MARKETABLE SECURITIES-
Marketable securities consist of investment grade commercial paper. We account
for marketable securities in accordance with Financial Accounting Standards
Board Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" and, accordingly, all such instruments are classified as "available
for sale" securities which are reported at fair value, with unrealized gains
and losses included in accumulated other comprehensive income.
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(b) AMORTIZATION-
Other assets include the cost of trademark registrations and product
formulations in connection with our investment in our Elemis Limited
subsidiary, and the intellectual property represented by rights acquired by
Steiner Leisure in connection with its investment in the BSC Rights. Costs
relating to such trademark registrations, product formulations and rights are
amortized on the straight-line method over the estimated lives of those
respective costs (ranging from 15 to 30 years). Amortization of the license
rights acquired in connection with the EBSC investment commenced in April 1998,
the month of the effective date of the first area development agreement entered
into by EBSC.
(c) GOODWILL-
Goodwill represents the excess of cost over the fair market value of
identifiable net assets acquired (see Note 4). Goodwill is amortized on a
straight-line basis over its estimated useful life of 20 years. Steiner Leisure
continually evaluates intangible assets and other long-lived assets for
impairment whenever circumstances indicate that carrying amounts may not be
recoverable. When factors indicate that the assets acquired in a business
purchase combination and the related goodwill may be impaired, we recognize an
impairment loss if the undiscounted future cash flows expected to be generated
by the asset (or acquired business) are less than the carrying value of the
related asset.
(d) MINORITY INTEREST-
Minority interest represents the minority shareholders' proportional share of
the net assets of EBSC.
(e) INCOME TAXES-
Steiner Leisure files separate tax returns for its domestic subsidiaries. In
addition, our foreign subsidiaries file income tax returns in their respective
countries of incorporation, where required. Steiner Leisure follows Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes". SFAS No. 109 utilizes the liability method and deferred taxes are
determined based on the estimated future tax effects of differences between the
financial statement and tax bases of assets and liabilities given the
provisions of enacted tax laws. SFAS No. 109 permits the recognition of
deferred tax assets. Deferred income tax provisions and benefits are based on
the changes to the asset or liability from period to period.
(f) TRANSLATION OF FOREIGN CURRENCIES-
Assets and liabilities of foreign subsidiaries are translated at the rate of
exchange in effect at the balance sheet date; income and expenses are
translated at the average rates of exchange prevailing during the year. The
related translation adjustments are reflected in the accumulated other
comprehensive income section of the consolidated balance sheets. Foreign
currency gains and losses resulting from transactions, including intercompany
transactions, are included in the statements of operations.
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(g) EARNINGS PER SHARE-
Basic earnings per share is computed by dividing the net income available to
shareholders by the weighted average number of outstanding common shares. The
calculation of diluted earnings per share is similar to basic earnings per
share except that the denominator includes dilutive common share equivalents
such as share options. The computation of weighted average common and common
equivalent shares used in the calculation of basic and diluted earnings per
share is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
Weighted average shares outstanding used in
calculating basic earnings per share 16,535,000 16,312,000 16,445,000 16,299,000
Dilutive common share equivalents 523,000 502,000 596,000 521,000
---------- ---------- ---------- ----------
Weighted average common and common
equivalent shares used in calculating diluted
earnings per share 17,058,000 16,814,000 17,041,000 16,820,000
========== ========== ========== ==========
Options outstanding which are not included in
the calculation of diluted earnings per share
because their impact is antidilutive 195,000 431,000 195,000 431,000
========== ========== ========== ==========
(h) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS-
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("ACSEC") issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." SOP 98-1 establishes criteria for determining
which costs of developing or obtaining internal-use computer software should be
charged to expense and which should be capitalized. Steiner Leisure adopted SOP
98-1 prospectively effective January 1, 1999. The adoption of SOP 98-1 did not
have a material effect on our financial position or results of operations.
In April 1998, the ACSEC issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 establishes standards for the reporting and disclosure of
start-up costs, including organization costs. Steiner Leisure adopted SOP 98-5
effective January 1, 1999. The adoption of SOP 98-5 did not have a material
effect on our financial position or results of operations.
(4) ACQUISITION:
On August 24, 1999, Steiner Leisure acquired the assets of Florida College in
consideration of approximately $7,700,000 (including purchase price adjustments)
in cash and $1,000,000 of Steiner Leisure common shares. The transaction was
accounted for under the purchase method of accounting. The purchase price
exceeded the fair market value of net assets acquired resulting in goodwill of
approximately $8,600,000.
Unaudited pro forma consolidated results of operations assuming the Florida
College acquisition had occurred at the beginning of the periods presented are
as follows:
September 30,
------------------------------
1998 1999
----------- -----------
Revenue $78,695,000 $98,401,000
Net income 12,600,000 15,333,000
Diluted earnings per share $ 0.74 $ 0.91
=========== ===========
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The pro forma results of operations are presented for informational purposes
only and may not necessarily reflect the future results of operations of
Steiner Leisure or what the results of operations would have been had we owned
and operated Florida College as of January 1, 1998.
(5) ACCRUED EXPENSES:
Accrued expenses consist of the following:
December 31, September 30,
1998 1999
------------ -------------
Operative commissions $1,387,000 $1,844,000
Guaranteed minimum rentals 2,144,000 2,358,000
Bonuses 910,000 650,000
Staff shipboard accommodations 326,000 398,000
Other 1,667,000 3,030,000
---------- ----------
$6,434,000 $8,280,000
========== ==========
(6) COMPREHENSIVE INCOME:
Steiner Leisure adopted SFAS No. 130, "Reporting Comprehensive Income,"
effective January 1, 1998. SFAS No. 130 establishes standards for reporting and
disclosure of comprehensive income and its components in financial statements.
The components of Steiner Leisure's comprehensive income are as follows:
Nine Months Ended
September 30,
-----------------------------
1998 1999
----------- -----------
Net income $12,793,000 $15,901,000
Unrealized gain (loss) on marketable
securities, net of income taxes 726,000 (23,000)
Foreign currency translation
adjustments, net of income taxes 137,000 (474,000)
----------- -----------
Comprehensive income $13,656,000 $15,404,000
=========== ===========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Steiner Leisure Limited is the leading worldwide provider of spa
services and skin and hair care products on board cruise ships. Payments to
cruise lines are based on a percentage of our passenger revenues and, in
certain cases, a minimum annual rental or a combination of both. Steiner
Leisure also sells its services and products through land-based channels,
including the Atlantis Spa on Paradise Island in The Bahamas. Steiner Leisure
also operates four post secondary schools in Florida offering degree and
non-degree programs in massage therapy and skin care and related courses.
Steiner Leisure is a Bahamian IBC. The Bahamas does not tax Bahamian
IBCs. We believe that income from our maritime operations will be foreign
source income that will not be subject to United States, United Kingdom or
other taxation. Approximately 86% of our income for the first nine months of
1999 was not subject to United States or United Kingdom income tax. To the
extent that our income from non-maritime operations in jurisdictions that
impose income taxes increases more rapidly than any increase in our
maritime-related income, the percentage of our income subject to tax would
increase. The income from our United States subsidiaries, Steiner Beauty
Products, Inc., Steiner Management Services, LLC and FCNH, Inc. is subject
to U.S. federal income tax at regular corporate rates (generally up to 35%) and
may be subject to additional U.S. federal, state and local taxes. Earnings from
Steiner Training and Elemis Limited, our United Kingdom subsidiaries which
accounted for a total of 7.5% of our pre-tax income for the first nine months
of 1999, will be subject to U.K. tax rates (generally up to 31%).
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain
selected income statement data expressed as a percentage of revenues:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1998 1999 1998 1999
----- ----- ----- -----
Revenues:
Services.................................................... 58.1% 59.9% 59.1% 58.5%
Products.................................................... 41.9 40.1 40.9 41.5
----- ----- ----- -----
Total revenues........................................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of sales:
Cost of services............................................ 44.8 46.1 45.7 45.1
Cost of products............................................ 28.3 27.9 27.7 28.8
----- ----- ----- -----
Total cost of sales...................................... 73.1 74.0 73.4 73.9
----- ----- ----- -----
Gross profit.................................................. 26.9 26.0 26.6 26.1
Operating expenses:
Administrative.............................................. 4.5 4.4 4.6 4.7
Salary and payroll taxes.................................... 4.7 4.5 5.0 4.6
Amortization of goodwill.................................... -- 0.1 -- 0.1
----- ----- ----- -----
Total operating expenses................................. 9.2 9.0 9.6 9.4
----- ----- ----- -----
Income from operations................................... 17.7 17.0 17.0 16.7
Other income.................................................. 1.7 1.2 1.6 1.4
----- ----- ----- -----
Income before provision for income taxes...................... 19.4 18.2 18.6 18.1
Provision for income taxes.................................... 1.9 1.1 1.3 1.1
----- ----- ----- -----
Net income.................................................... 17.5% 17.1% 17.3% 17.0%
===== ===== ===== =====
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THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues. Revenues increased approximately 27.7%, or $7.5 million, to
$34.4 million in the third quarter of 1999 from $26.9 million in the third
quarter of 1998. Of this increase, $4.9 million was attributable to increases
in services provided on cruise ships and the commencement of services at the
Atlantis Spa during the first quarter of 1999 and $2.5 million was attributable
to increases in sales of products, including sales at the Atlantis Spa. The
increase in revenues for the third quarter of 1999 compared to the third
quarter of 1998 was primarily attributable to an increase of seven in the
average number of ships in service with enhanced large spa facilities, and an
increase of two in the average number of non-spa ships in service for the same
period. The Company had a total of 988 shipboard and Atlantis Spa staff members
in service on average in the third quarter of 1999 compared to 847 shipboard
(the Atlantis Spa had not yet opened) staff members in service on average in the
third quarter of 1998. Revenues per staff per day increased by 8.4% in the third
quarter of 1999 compared to the third quarter of 1998.
Cost of Services. Cost of services as a percentage of services revenue
decreased to 77.0% in the third quarter of 1999 from 77.1% in the third quarter
of 1998. This decrease was due to increases in productivity of onboard staff
during the third quarter of 1999 compared to the third quarter of 1998,
increased revenues on ships where we are subject to minimum annual rental
payments and a decrease in rent allocable to services on cruise ships covered
by an agreement which was renewed in 1998 and became effective in the first
quarter of 1999.
Cost of Products. Cost of products as a percentage of products revenue
increased to 69.5% in the third quarter of 1999 from 67.5% in the third quarter
of 1998. This increase was due to increases in rent allocable to products sales
on cruise ships covered by an agreement which was renewed in 1998 and became
effective in the first quarter of 1999, and discounts offered on "Elemis"
products, other than the recently re-formulated product lines. This increase
was partially offset by increases in productivity of onboard staff.
Operating Expenses. Operating expenses as a percentage of revenues
decreased to 9.0% in the third quarter of 1999 from 9.2% in the third quarter
of 1998 as a result of the increase in aggregate revenues generated from the
additional ships in service during the third quarter of 1999 compared to the
comparable period in 1998.
Provision for Income Taxes. The provision for income taxes decreased
to an overall effective rate of 6.1% for the third quarter of 1999 from an
overall effective rate of 9.9% for the third quarter of 1998 primarily due to a
one time tax charge of $237,000 recorded at Elemis Limited during the third
quarter of 1998 resulting from the sale of the rights to the "Elemis" name and
certain other rights to Cosmetics, Limited, a Bahamian subsidiary of Steiner
Leisure (the "Elemis Charge"). This decrease was partially offset by an
increase in the income earned in jurisdictions that tax our income increasing
at a greater rate than the income earned in jurisdictions that do not tax our
income.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues. Revenues increased approximately 26.2%, or $19.5 million, to
$93.7 million for the nine months ended September 30, 1999 from $74.2 million
for the nine months ended September 30, 1998. Of this increase, $10.9 million
was attributable to increases in services provided on cruise ships and the
commencement of services at the Atlantis Spa during the first quarter of 1999
and $8.5 million was attributable to increases in sales of products, including
sales at the Atlantis Spa. The increase in revenues for the first nine months
of 1999 compared to the same period in the prior year was primarily
attributable to an increase of five in the average number of ships in service
with enhanced large spa facilities, and an increase of one in the average of
non-spa ships in service for the same period. The Company had a total of 920
shipboard and Atlantis Spa staff members in service on average during the nine
months ended September 30, 1999 compared to 825 shipboard (the Atlantis Spa had
not yet opened) staff members in service on average during the nine months ended
September 30, 1998. Revenues per staff per day increased by 12.3% in the first
nine months of 1999 compared to the comparable period of 1998.
Cost of Services. Cost of services as a percentage of services revenue
decreased to 77.1% in the first nine months of 1999 from 77.3% for the first
nine months of 1998. This decrease was due to an increase in productivity of
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onboard staff during the first nine months of 1999 compared to the same period
in prior year, increased revenues on ships where we are subject to minimum
annual rental payments, and a decrease in rent allocable to services on cruise
ships covered by an agreement which was renewed in 1998 and became effective in
the first quarter of 1999.
Cost of Products. Cost of products as a percentage of products revenue
increased to 69.4% in the first nine months of 1999 from 67.7% for the first
nine months of 1998. This increase was primarily due to increases in rent
allocable to products sales on cruise ships covered by an agreement which was
renewed in 1998 and became effective in the first quarter of 1999, and
discounts offered on "Elemis" products, other than the recently re-formulated
product lines. This increase was partially offset by increases in productivity
of onboard staff.
Operating Expenses. Operating expenses as a percentage of revenues
decreased to 9.4% for the first nine months of 1999 from 9.6% for the first
nine months of 1998 as a result of the increase in aggregate revenues generated
from the additional ships in service during the first nine months of 1999
compared to the comparable period in 1998.
Provision for Income Taxes. The provision for income taxes decreased
to an overall effective rate of 6.2% for the first nine months of 1999 from an
overall effective rate of 7.2% for the first nine months of 1998 due to the one
time Elemis Charge recorded during the third quarter of 1998. This decrease was
partially offset by an increase in the income earned in jurisdictions that tax
our income increasing at a greater rate than the income earned in jurisdictions
that do not tax our income.
COMPETITION
In order for us to maintain our market share of the spa services and
skin and hair care products concessions on cruise ships for the next few years,
we have entered into, and are negotiating to enter into, respectively,
agreements that extend, and would extend the terms of our current agreements
with certain of our larger cruise line customers. However, these agreements
contain terms which reduce, and would reduce our profit margins compared to
those current agreements. We believe that these extensions and renewals are
important to our business because they allow, and would allow, us to serve the
new, large ships that are being introduced, and are projected to be introduced,
by these cruise lines, which will include enhanced large spa facilities, and
which ships otherwise might be served by competitors in a position to provide
financially viable alternatives to our services for the cruise lines.
Certain of the agreements referenced above are currently under
negotiation. Accordingly, while we believe that any renewals of those
agreements would result in decreased profit margins for us, there can be no
guarantee that any renewals would be for more than one year. We also cannot
guarantee that we will be able in the future to enter into renewed cruise line
agreements that provide for multi-year extensions, even if the agreements
provide for reduced profit margins for us.
SEASONALITY
Although certain cruise lines have experienced moderate seasonality,
we believe that the introduction of cruise ships into service throughout a year
has mitigated the effect of seasonality on our results of operations. In
addition, decreased passenger loads during slower months for the cruise
industry has not had a significant impact on our revenues. However, due to our
dependence on the cruise industry, revenues may in the future be affected by
seasonality.
LIQUIDITY AND CAPITAL RESOURCES
Steiner Leisure's business is operated with cash generated from
operations.
Cash flow from operating activities during the first nine months of
1999 was $15.8 million compared to $11.1 million in the first nine months of
1998. This increase is primarily due to the increase in our net income. In
connection with the construction of the Atlantis Spa, we spent $2.5 million
this year through July 1999 and $3.1 million in 1998. These $5.6 million of
capital expenditures will be amortized over the fifteen-year term of our
arrangement with the owner of the Atlantis Resort. Steiner Leisure had working
capital of approximately $41.0 million at September 30, 1999 compared to $35.9
million at December 31, 1998.
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In August 1999, Steiner Leisure acquired the assets of Florida College
for approximately $7.7 million dollars in cash (including purchase price
adjustments) and $1.0 million in Steiner Leisure common shares. The cash portion
of the purchase price was funded from our working capital.
Through November 12, 1999, we purchased a total of 335,000 of our
common shares in the open market for an aggregate purchase price of
approximately $6.0 million. The cash used to make such purchases was funded from
our working capital. These purchases were made pursuant to a share purchase
program authorized by our Board of Directors.
We believe that cash generated from operations is sufficient to
satisfy the cash required to operate our business. Any significant acquisition
may require outside financing.
INFLATION
Steiner Leisure does not believe that inflation has had a material
adverse effect on revenues or results of operations. However, public demand for
leisure activities, including cruises, is influenced by general economic
conditions, including inflation. Periods of economic recession or high
inflation, particularly in North America where a number of cruise passengers
reside, could have a material adverse effect on the cruise industry upon which
we are dependent.
YEAR 2000 COMPLIANCE
The term "Year 2000 issue" is a general term used to describe the
various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000
is approached and reached. These problems generally arise from the fact that
most of the world's computer hardware and software have historically used only
two digits to identify the year in a date, often meaning that the computer will
fail to distinguish dates in the "2000s" from dates in the "1900s." These
problems may also arise from other sources as well, such as the use of special
codes and conventions in software that make use of the date field.
We have developed a plan to assess the overall impact to Steiner
Leisure with respect to the Year 2000 issue. Part of our plan is to identify
areas of risk and to develop means to mitigate these risks. This includes
assessing the Year 2000 compliance of our cruise line customers and our major
third party suppliers.
In order for us to make an assessment of the Year 2000 risks that may
have a material adverse effect on our results of operations, we have conducted
a survey of our cruise line customers and major third party suppliers of
services and products. With respect to our cruise line customers, as of
November 12, 1999, a number of those surveyed have refused to respond for
liability reasons, while others have failed to respond without providing any
reason therefor. The 16 cruise lines that responded expect to be Year 2000
compliant before January 1, 2000. We are actively pursuing responses from the
remaining 11 cruise lines that have not responded.
With respect to our major third party suppliers, as of November 12,
1999, we obtained 30 responses or statements published through the Internet
indicating that they expect to be Year 2000 compliant prior to January 1, 2000.
We are actively pursuing responses for the remaining 23 major third party
suppliers that have not responded. In the absence of adequate responses, or
other formal communications from either our cruise line customers or our major
third party suppliers, we are attempting to make our own assessment as to their
readiness.
We believe that our biggest risks related to the Year 2000 issue are
associated with potential concerns with cruise line customers and major third
party suppliers. The most reasonably likely source of Year 2000 risk with
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respect to our cruise line customers would be the disruption of transportation
channels that deliver passengers to cruise ships. The disruption of
transportation channels could also impede our ability to deliver our products
to intended points of sale or the ability of our staff to report to the ships
to which they are assigned.
We do not believe that there are contingency plans that we can effect
that can mitigate the risk of cruise line passengers being unable to reach
cruise ships as a result of any transportation disruption. We are in the
process of developing a contingency plan that would allow us to have available
product inventories sufficient for distribution to our intended points of sale
in the event a transportation disruption impairs our ability to obtain delivery
of our products. In addition, we intend to develop a schedule of deployment of
our shipboard staff to minimize the effect of any transportation disruption
that could occur around January 1, 2000. These contingency plans are subject to
uncertainties. We cannot guarantee that any estimate of the level, impact or
duration of Year 2000 non-compliance by our customers or suppliers will be
accurate, or that our contingency plans will be sufficient to mitigate these
risks.
In the event that any of our cruise line customers or major third
party suppliers do not successfully achieve Year 2000 compliance for their own
operations in a timely manner, our business or operations could be adversely
affected. The magnitude of any adverse effect cannot be quantified at this time
because of variables such as the type and importance of cruise line customers
or major third party suppliers that have not responded, the unknown level and
duration of noncompliance by these customers and suppliers (and their customers
and suppliers), the possible effect on our operations and our ability to
respond to any non-compliance.
Costs related to our actions to become Year 2000 compliant are funded
through cash from operating activities. We estimate that total costs related to
becoming Year 2000 compliant will be approximately $150,000, and approximately
$100,000 of this amount will be capitalized. Through September 30, 1999, we
have expended approximately $120,000 in connection with the Year 2000 issue. We
believe that the costs related to updating or replacing existing computer
systems in order to become Year 2000 compliant will not be material. We believe
that our systems are Year 2000 compliant. However, in view of the uncertainties
relating to the Year 2000 compliant status of our customers and suppliers, we
cannot guarantee that our cost of dealing with the Year 2000 issue will be
consistent with the foregoing estimates or that the Year 2000 issue will not
materially adversely affect Steiner Leisure's future operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
From time to time, including herein, Steiner Leisure may publish
"forward-looking" statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. The words "may," "will," "intend," "expect,"
"proposed," "anticipate," "believe," "estimate" and similar expressions are
intended to identify such forward-looking statements. Because such statements
include risks and uncertainties, actual results may differ materially from
those expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ materially from those expressed or implied
by such forward-looking statements include, but are not limited to, the
following: current cruise line negotiations resulting in agreements which were
not as beneficial to us as anticipated or non-renewals of agreements; our
dependence on cruise line concession agreements of specified terms and that are
terminable by cruise lines with limited or no advance notice under certain
circumstances; our dependence on the cruise industry and our being subject to
the risks of that industry; our obligation to make certain minimum payments to
certain cruise lines irrespective of the revenues received by us from
passengers; our dependence on a limited number of cruise companies and on a
single product manufacturer; our dependence for success on our ability to
recruit and retain qualified personnel; changes in the non-U.S. tax status of
our principal subsidiary; changing competitive conditions; changes in laws and
government regulations applicable to us and the cruise industry; our limited
experience in land-based operations including with respect to the integration of
acquired businesses; product liability or other claims against us by customers
of our products or services; and our failure, or the failure of a cruise line
customer or supplier, to correct a material Year 2000 problem. We assume no duty
to update these forward-looking statements. The risks to which we are subject
are more fully described under "Certain Factors That May Affect Future Operating
Results" in our Annual Report on Form 10-K for the fiscal year ended December
31, 1998, filed with the Securities and Exchange Commission.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) In connection with our acquisition of Florida College, we
issued to Florida College of Natural Health, Inc. on August
24, 1999 (in escrow until November 12, 1999) 35,744 of our
common shares, which had a market value of approximately $1.0
million, as part of the purchase price of that acquisition.
That issuance was without registration under the Securities
Act of 1933, as amended (the "Act"), pursuant to the
exemption from registration provided in Section 4(2) under
the Act, based on its being a transaction not involving any
public offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
10.20 Employment Agreement dated August 24, 1999 between
Steiner Education Group, Inc. and Neal R. Heller
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 15, 1999
STEINER LEISURE LIMITED
---------------------------------------------------
(Registrant)
/s/ Clive E. Warshaw
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Clive E. Warshaw
Chairman of the Board and Chief Executive Officer
/s/ Leonard I. Fluxman
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Leonard I. Fluxman
President and Chief Operating Officer
/s/ Carl S. St. Philip, Jr.
---------------------------------------------------
Carl S. St. Philip, Jr.
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
Exhibit No. Description
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10.20 Employment Agreement dated August 24, 1999 between Steiner
Education Group, Inc. and Neal R. Heller
27 Financial Data Schedule
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